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High-Yield Savings and Cash Management: Where to Keep Idle Cash

Savings rates vary widely by bank. High-yield savings, money market funds, and T-bills can pay more, with different insurance and tax treatment.

High-Yield Savings and Cash Management: Where to Keep Idle Cash

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Where can idle cash earn more?

  • Deposit rates vary widely, and standard savings accounts at many large banks pay far less than online banks and credit unions.
  • High-yield savings accounts are insured bank deposits with variable rates.
  • Money market funds and Treasury bills track short-term market rates more directly, but they're securities, not deposits.
  • The trade-offs among them are insurance, speed of access, and state tax treatment.
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Full Guide

Where can idle cash earn more?

  • Deposit rates vary widely, and standard savings accounts at many large banks pay far less than online banks and credit unions.
  • High-yield savings accounts are insured bank deposits with variable rates.
  • Money market funds and Treasury bills track short-term market rates more directly, but they're securities, not deposits.
  • The trade-offs among them are insurance, speed of access, and state tax treatment.

How do high-yield savings accounts work?

  • FDIC insurance covers up to $250,000 per depositor, per insured bank, per ownership category.
  • Rates are variable and can fall quickly when the Federal Reserve lowers rates.
  • Transfers to an outside checking account typically take one to three business days.
  • Some apps hold deposits at partner banks, so confirm which insured bank holds your money and how coverage applies.

How do money market funds compare?

  • They're mutual funds that invest in short-term debt and seek a stable $1.00 share price, which isn't assured.
  • Government money market funds invest at least 99.5% in cash, government securities, and repurchase agreements backed by them.
  • They aren't FDIC-insured, and SIPC covers missing assets if a brokerage fails, not declines in value.
  • Dividends from Treasury holdings may be state-tax-exempt, depending on the fund's holdings and your state's rules.

Why do Treasury bills appeal to residents of high-tax states?

  • Treasury interest is exempt from state and local income tax, and California's top rate reaches 13.3% including the 1% mental health tax.
  • The higher your state bracket, the bigger the after-tax difference versus fully taxable interest.
  • T-bills are issued in terms from 4 to 52 weeks and sold at a discount to face value.
  • They can be bought at TreasuryDirect or through a brokerage; selling before maturity means taking the market price.

How can cash be organized in tiers?

  • Keep a few weeks of spending in checking.
  • Hold an immediate reserve in a high-yield savings account for emergencies needing quick access.
  • Hold a deeper reserve in money market funds or T-bills for money needed within months.
  • Match known future payments, such as a tax bill or down payment, to T-bills or CDs maturing before the due date.
  • Money not needed for several years faces inflation risk if it stays in cash.

Key takeaways

  • Rate differences between banks can be large, so the account you use matters.
  • Bank deposits are FDIC-insured; money market funds and T-bills are not deposits.
  • Treasury interest is state-tax-exempt, which matters most in high-tax states like California.
  • A tiered structure balances access, yield, and taxes.
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